April 4, 2013 / 2:51 PM / 4 years ago

Fitch Affirms Home Capital's IDRs at 'BBB/F2'; Outlook Remains Negative

(The following statement was released by the rating agency) NEW YORK, April 04 (Fitch) Fitch Ratings has affirmed the 'BBB/F2' long-term and short-term IDRs of Home Capital Group Inc. (HCG). The Rating Outlook remains Negative. A complete list of rating actions follows at the end of this release. RATING ACTION RATIONALE HCG's IDRs reflect its concentrated business mix, small size and funding reliance on brokered time deposits. Ratings are supported by HCG's solid performance, favorable track record and sound overall financial condition. The Negative Outlook continues to stem from HCG's focus on the residential mortgage business, which makes the company susceptible to possible future pressure in the Canadian housing market. KEY RATING DRIVERS - IDRs, VR and Senior Debt The HCG's lending activities focus on the Canadian residential mortgage market with the bulk of its activities in the Ontario market. The Canadian housing market has generally remained healthy to date but is showing signs of slowing down. High levels of consumer indebtedness and the risk of overvaluation in the Canadian housing market are key macro concerns. Mortgage portfolio quality remains sound, given the positive Canadian housing market in recent years combined with the company's hands-on underwriting process and deep knowledge of its home market. HCG focuses on mortgage borrowers who do not qualify for prime loans offered by the major banks. Typical clients consist of the self-employed, individuals with limited credit histories, and newly arrived immigrants. HCG's business model relies chiefly on residential mortgage brokers to source its customers. HCG uses relatively high-cost brokered deposits for funding, reflecting its modest branch network. HCG exhibits a significant reliance on relatively high-cost and potentially more volatile brokered time deposits. These consist primarily of guaranteed investment certificates (GICs) maturing from 30 days to five years. The company uses these time deposits to match fund maturities of mortgage assets, thereby keeping interest rate risk well controlled. Individual accounts are generally maintained below $100,000 (the maximum deposit insurance protection) and, thus, are viewed by Fitch as fairly stable as long as HCG's rates remain attractive. In 2012, HCG continued to report strong earnings, benefitting from stable net interest margins, continued volume growth, low provisions for loan losses and good operating efficiency. HCG well exceeds Basel III capital and liquidity standards, but these capital and liquidity levels are considered necessary given its narrow business focus and funding structure. The Tier 1 common ratio stood at 16.1% as of year-end 2012. Fitch core capital (FCC) to risk weighted assets (RWA) was 15.9% and FCC/Tangible Assets (excluding on balance sheet securitizations) was 7%. RATING SENSITIVITIES - IDRs, Senior Debt and VR Positive rating momentum is unlikely due to geographic and product concentration, as well as HCG's limited franchise and funding mix. Deterioration in the overall housing market and/or adverse credit performance within HCG's portfolio and/or a significant shift from HCG's core expertise in residential mortgages toward higher yielding and potentially higher risk commercial and personal lending products could result in a downgrade particularly in the event of a significant decline in operating performance and/or capital erosion. More aggressive capital management (either as a percentage of RWA or tangible assets) could result in rating pressure. This is considered unlikely as HCG is anticipated to keep capital ratios well above regulatory minimums. Rating pressure would ensue if HCG's ability to source cost effective funding is compromised. KEY RATING DRIVERS - Support and Support Rating Floors HCG has a Support Rating of '5' and Support Rating Floor of 'NF'. Fitch believes that HCG is not systemically important and therefore, the probability of support is unlikely. RATING SENSITIVITIES - Support and Support Rating Floors Fitch does not anticipate changes to HCG's Support Ratings or Support Rating Floors given Fitch's view that HCG will remain a non-systemically important institution. Headquartered in Toronto, HCG is primarily a residential mortgage lender, but also offers other consumer lending and commercial real estate finance. HCG conducts its activities through its federally regulated trust subsidiary Home Trust Company (HTC). Fitch has taken the following rating actions: Home Capital Group, Inc. --Long-term IDR affirmed at 'BBB'; --Senior Debt affirmed at 'BBB'; --Viability Rating affirmed at 'bbb'; --Short-term IDR affirmed at 'F2'; --Support affirmed at '5'; --Support Floor affirmed at 'NF'. Home Trust Company --Long-term IDR affirmed at 'BBB'; --Viability Rating affirmed at 'bbb'; --Short-term IDR affirmed at 'F2'; --Support affirmed at '5'; --Support Floor affirmed at 'NF'. The Rating Outlook remains Negative. Primary Analyst Joseph Scott Senior Director +1-212-908-0624 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Justin Fuller, CFA Director +1-312-368-2057 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Canadian Banks: 2012 Results and Performance Outlook' (Feb. 26, 2013); --'2013 Outlook: Canadian Banks' (Nov. 14, 2012); --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012). Applicable Criteria and Related Research Canadian Banks: 2012 Results and Performance Outlook here 2013 Outlook: Canadian Banks (Stable Outlook, But Household Debt Remains Key Risk) here Global Financial Institutions Rating Criteria here Rating FI Subsidiaries and Holding Companies here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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